If you’re in the market for credit, a home equity line of credit is one of several options that might be right for you. Here’s the breakdown of what you can expect with a HELOC.
What is a HELOC?
HELOC, which stands for Home Equity Line of Credit, is a line of credit based on the equity you have in your home. In layman’s terms, it gives you access to a revolving supply of cash in which your home serves as collateral. It works like a credit card – you use the funds as needed, pay down, repeat. You can access as much or as little of your line of credit at any time. Borrowers will make interest-only minimum monthly payments or pay off the balance and keep the line open.
To help you determine how much equity you have, take your home’s value minus what you owe on your mortgage. If your house is worth more than the remaining balance on your mortgage, good news – you’ve got equity.
The Benefits of a HELOC
A HELOC offers homeowners several benefits, including:
• Instant loan decisions
• No Private Mortgage Insurance (PMI)
• Up to 115% loan-to-value
• Easy access to your line’s funds by phone, at our branches, online or with checks
• Tax-deductible interest if you use the money to buy, build, or upgrade your home
Once you’re approved for a home equity line, lenders set the credit limit on a home equity line by taking a percentage of the home’s appraised value and subtracting the balance owed on the existing mortgage. Here’s an example:
|Balance Still Owed on Mortgage||$40,000|
|Potential Line of Credit||$40,000|
What are the Requirements of a HELOC?
Like with any line of credit, a HELOC has specific borrowing requirements. Requirements for borrowing against home equity vary by lender, but these standards are typical:
• Equity in your home of at least 15% to 20% of its value, which is determined by an appraisal
• The debt-to-income ratio of 43%
• Credit score of 620 or higher
In determining your credit limit, Deseret First Credit Union will consider your ability to repay the loan (principal and interest) by looking at your income, debts, and other financial obligations as well as your credit history.
Reasons to Get a Home Equity Line of Credit
A HELOC is an excellent source of cash, but there is a right and a wrong way to use them. Here are four reasons why you should unlock the equity in your home.
1. Home Improvements
Perhaps the best use of a HELOC is for home repairs and improvements. However, be mindful of the type of home improvements you make. For example, an attractive and modern kitchen is one of the top priorities for home buyers, so consider adding new flooring, countertops, and appliances. After the kitchen, the best rooms to upgrade in your house are bathrooms and bedrooms. Plus, certain energy-efficient upgrades could offer tax benefits and lower energy bills on top of adding value to the home. Keep in mind that luxury additions, such as a pool, may not add too much to your home’s value.
2. Emergency Expenses
A HELOC could be a good source if you need fast cash for an emergency. Saving thousands of dollars could take years. But with a HELOC, you could have access to up to 85% of your home’s appraised value within a matter of days. This could help you cover unexpected medical expenses, job loss, or any other financial crisis.
3. High-Interest Debts
Dealing with high-interest credit card debt can be stressful and frustrating, especially if it’s starting to snowball out of control. Homeowners can use home equity to pay off personal debts, including a car loan or credit card.
4. Funding Investment Properties
Funding an investment property is a solid wealth-building strategy for investors. Although there are a variety of ways to finance a rental property, pursuing the HELOC route is an ideal option. Keep in mind that lenders may hold higher credit standards for HELOCs drawn on investment properties.
Avoid using a HELOC for basic expenses like groceries, clothing, utilities, and phone bills. In a nutshell, only tap into your home equity for things that will produce a positive return.
Should You Get a HELOC?
If you’re looking for a loan solution that allows you to control the money and the payments, we highly recommend considering a HELOC. A HELOC allows homeowners to use money as they need it and only pay interest on what they actually borrowed. Before applying for a HELOC, ask yourself how you’re going to spend it and make sure you understand the terms and conditions. HELOCs typically have a 10-year drawdown period and a 20-year repayment period. Also, make sure you have a repayment plan and determine how it fits into your overall financial plan.
Unlock Your Home Equity with DFCU
Let your home’s equity work for you with one of our home equity products from Deseret First Credit Union.